What’s Behind FTX Filing for Bankruptcy Protection?

    On November 11, FTX filed for U.S. bankruptcy protection after being unable to reach an agreement to help the company resolve its financial difficulties. Many consider this to be the end of one of the top crypto exchanges. But is it all that simple?

    As reported, crypto exchange FTX and about 130 affiliated companies including Alameda Research, the crypto trading company filed for bankruptcy. Bankman-Fried also stepped down as CEO and was replaced by John J. Ray III.

    In a 23-page bankruptcy filing published by CNBC, FTX said it has more than 100,000 creditors, assets in the range of $10 billion to $50 billion, as well as liabilities in the range of $10 billion to $50 billion. Bankman-Fried also indicated he wishes to appoint Stephen Neal as the firm’s new chairman of the board

    However, the recent filing for bankruptcy protection showed that there is much more behind this shocking collapse. What’s really happening? Let’s take a closer look at this action with

    Mysterious Powerful Bosses of Alameda Research

    Alameda is a charter city in California, United States. To explain, a charter city is a city in which the governing system is defined by the city’s own charter document rather than solely by general law. In states where city charters are allowed by law, a city can adopt or modify its organizing charter by the decision of its administration by the way established in the charter. These cities may be administered predominantly by residents or through a third-party management structure because a charter gives a city the flexibility to choose novel types of government structure. 

    In short, this city is in the US but is under the management of mysterious bosses.

    This group wants to set up an investment fund and recruit young people who have great talent in Mathematics and computer science at famous American universities. And so in October 2017, the Alameda Research investment fund was born, aiming to establish a large-scale cryptocurrency-related derivative exchange with a super-strong technology system. So as we all know, FTX took place in April 2019, headquartered in Hong Kong, which is considered a tax haven. Notably, Alameda Research, the parent company of FTX, is an investment fund, making its tax payment at a very low rate.

    The Fund gathers senior leaders who are all experts in Mathematics and computers, have experience with trading stocks and bonds in the past, and worked in reputable investment funds. Some of the prominent names are: 

    whats-behind-ftx-filing-for-bankruptcy-protection 1
    Alameda Research senior leaders

    – Sam Trabucco: Co-CEO of Alameda Research. He graduated from MIT in 2015 majoring in math and computer science. Sam was previously a bond trader for SIG.

    – Caroline Ellison: Co-CEO of Alameda Research. She graduated from Stanford University with a degree in mathematics. Before joining Alameda in 2018, Caroline worked at Jane Street as a stock exchange trader.

    – Nate Parke: CTO of Alameda Research. Nate graduated from UC Berkeley EECS in 2017. Before becoming CTO of Alameda, he worked as a research fellow engineer for an investment fund at UC Berkeley RISE Labs.

    Why Did the FTX exchange File for Bankruptcy Protection in The US?

    Firstly, you need to better understand bankruptcy protection law in the US. 

    Bankruptcy is generally understood as the company shutting down, paying its creditors, and disappearing from the market. But bankruptcy protection law in the US is different. The business filed for bankruptcy protection in the US because:

    – They have enough cash to repay the debt, but they want to use this money to invest in a more profitable field, so they file for bankruptcy protection, and the debt will be paid later.

    – The company and its creditors have separate agreements for mutual benefits. 

    For example: If the company’s stock price is low, it is not good to sell to pay the debt, instead, they file for bankruptcy protection and wait for the shares to reach 100% to pay creditors and earn a profit. This form mainly occurs when the company has shares with creditors or creditors have shares in the enterprise.

    Former US President Donald Trump is an example as he has filed for bankruptcy protection 9 times and even advised businesses in the US to do so as much as possible.

    whats-behind-ftx-filing-for-bankruptcy-protection 2
    Donald Trump has filed for U.S. bankruptcy protection 9 times

    Back to FTX, although it is headquartered in Hong Kong, the senior leaders are American nationals, so they can still file for bankruptcy protection in the US.

    Now, let’s take a look at the main sources of FTX revenue:

    – Holding money for investors who buy and sell derivative products related to cryptocurrencies, then depositing this money to the bank for interest. 

    – Collecting commissions in transactions

    – Laundering money for secret groups through buying and selling virtual currency, and crypto derivative products. 

    So, what leads to the “collapse”:

    – Bankman-Fried and the leadership team built software to create a token called FTX. They then called investors to open an account, and deposit money in the bank to buy and own FTX. This money was used to push FTX’s price from $0.5 to $18. After that, he took mortgaged FTX in the bank, collected the money, and once again push up the price of FTX to $23-25. Investors saw this and continued to buy with the expectation of a price to reach $50.

    whats-behind-ftx-filing-for-bankruptcy-protection 3
    Samuel Bankman-Fried, founder and former CEO of FTX

    – When FTX went up in price from $20-25, the bank holding the FTX tokens that Sam mortgaged, earned more than $2 billion in cash. Since no one else was pushing the price up, it only took 1 seller for FTX to plummet from $22 to $3.

    And here is the end of the game:

    – The bank had $2 billion after selling FTX tokens that Sam mortgaged for $20-25;

    – Investors who bought FTX lost $1.5 billion and they have cut all losses;

    – The bank bought FTX at a super low price and bought all FTX cut losses;

    – Sam owed the bank more than $600 million, filed for bankruptcy protection, and resigned.

    The real purpose of FTX when filing for bankruptcy protection:

    – Sam resigned from FTX so he’s no longer involved;

    – FTX took Sam’s debt, the bank gained $2 billion and accepted FTX’s bankruptcy for a while to clear the debt of $600 million and to make a profit of $1.4 billion. 

    Sum up

    It can be said that FTX had filed for bankruptcy protection with the purpose of stopping paying that debt for a period of time to collect money, then pay back to the bank. After confirmation from the US government, FTX will continue to operate normally.

    Disclaimer: This article is for informational purposes only, not investment advice. Investors should research carefully before making a decision.

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